Summary:
Intel recently reported its second-quarter earnings, with revenue declining 15% year over year but still exceeding analysts’ expectations. The chipmaker’s sales and profits have been shrinking, but there are signs of a cyclical turnaround. In Q2, Intel saw improvements in its client-computing group (CCG), data center and artificial intelligence (DCAI) group, and network and edge (NEX) group. The company’s adjusted gross and operating margins also expanded sequentially. Despite these positive developments, analysts predict a decline in revenue and adjusted EPS for the full year. Intel’s stock has already seen a significant rally, and it may tread water as it stabilizes its business over the next year.
Analysis:
– Intel’s revenue for Q2 declined 15% year over year to $12.9 billion, but it exceeded analysts’ expectations by $760 million. The company’s adjusted earnings per share (EPS) fell 54% to $0.13, while analysts had forecasted a loss of $0.03.
– The client-computing group (CCG) generated 53% of Intel’s revenue in Q2, mainly producing x86 CPUs for PCs. This segment has seen sales decline for eight consecutive quarters due to a cooling off in PC demand post-pandemic.
– The data center and artificial intelligence (DCAI) group accounted for 31% of Intel’s revenue, selling high-end Xeon CPUs and programmable chips for data centers. This segment has also faced revenue declines for five consecutive quarters.
– Intel’s network and edge (NEX) group, responsible for providing networking products and edge computing chips, brought in 11% of all revenue. This segment experienced a slowdown in momentum over the past two quarters.
– The remaining 5% of Intel’s revenue came from its stake in the automotive chipmaker Mobileye and its foundry division. These segments have also faced declines, contributing to Intel’s overall revenue decline for six consecutive quarters.
– On a quarter-over-quarter basis, Intel saw improvements in its CCG, DCAI, and NEX segments in Q2. CCG revenue rose 17%, DCAI revenue grew 8%, and NEX revenue dipped 7% compared to the previous quarter.
– Intel forecasts revenue of $12.9 billion to $13.9 billion for Q3, representing potential sequential growth of up to 8% but a decline of 9% to 16% compared to the previous year.
– Chief Executive Officer Pat Gelsinger predicts a “sustained recovery in the second half of the year” for the CCG unit, citing the normalization of PC chip inventories, upcoming product launches, and improved data center CPU roadmaps.
– Intel’s adjusted gross and operating margins expanded sequentially in Q2, indicating some stabilization in its revenue growth and cost-cutting measures. The company expects its adjusted gross margin to widen further in Q3.
– Analysts expect Intel’s revenue and adjusted EPS to decline 27% and 81%, respectively, for the full year. However, they forecast a recovery in 2024 with a 13% increase in revenue and a significant 346% increase in adjusted EPS.
– Based on these expectations, Intel’s stock is reasonably valued at 23 times next year’s earnings. However, the stock has already experienced a significant rally this year, and its reduced forward-dividend yield makes it less appealing to income investors.
– While Intel is taking steps in the right direction, there may be limited upside for its stock over the next year as the company works on stabilizing its business.
Key Points to Note:
– Intel’s Q2 revenue declined 15% year over year but surpassed analysts’ expectations.
– The client-computing group (CCG), data center and artificial intelligence (DCAI) group, and network and edge (NEX) group experienced improvements in Q2.
– Intel’s adjusted gross and operating margins expanded sequentially in Q2.
– Analysts predict a decline in revenue and adjusted EPS for the full year.
– Intel’s stock rally may limit future upside potential.
Conclusion:
Despite Intel’s rally in the stock market, the company’s cyclical downturn is not yet over. While there are positive signs of improvement in key segments and the stabilization of margins, analysts still anticipate a decline in revenue and adjusted EPS for the full year. Intel’s valuation suggests it is reasonably priced, but with limited potential for significant growth. Investors need to consider the company’s financial performance and outlook before making any investment decisions.
For more details, read the full article on The Motley Fool.
Reference: Where Will Intel Stock Be in 1 Year?